Many legal issues arise out of financing cannabis activities, not the least of which is whether a target property for a cannabis venture is mortgaged by a bank. The standard institutional mortgage contains language that allows the mortgagee to “call” the loan if the property is being used to conduct “illegal activity.” This language relates to federal lending guidelines and is usually nonnegotiable. The question thus becomes: what qualifies as “illegal activity”?

As a general matter, a contract for an illegal purpose is unenforceable. And while 29 states have passed some form of marijuana legislation, marijuana remains a controlled substance under federal law. The interplay between state and federal law has left the status of the marijuana industry—and the rights of involved lenders and borrowers—unclear. Several recent cases highlight this ambiguity.

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